MarketView for April 21

 

 

 

Summary 

 

Stocks ere little changed on Wednesday as disappointing outlooks from healthcare companies offset strong earnings from Morgan Stanley and Apple. Healthcare stocks took a beating after both Abbott Laboratories and Gilead Sciences cut profit forecasts, citing the impact of costs from healthcare reform legislation in their outlooks. Gilead fell nearly 10 percent to $40.76, while Abbott was down 2.4 percent a $51.78. The two companies represented a setback in what otherwise has been an upbeat earnings season to date.

 

After the closing bell, there was more disappointing news that may pressure the market on Thursday. Specifically, Qualcomm offered up a weak forecast for the current quarter and full year, sending its shares down 6 percent to $39.95 in after-hours trading. Meanwhile, EBay also offered up a forecast that fell short of expectations, sending its shares down 6.4 percent to $24.64 in after hours trading.

 

During the regular session, the S&P 500 crisscrossed the key support level of 1,200, which if lost may unleash more downward pressure after the benchmark index breached a key uptrend line from early February late last week. The broad index is still up 78 percent from the March 2009 bottom.

 

Among gainers, Morgan Stanley shares climbed 4.04 percent to $31.68 after posting a stronger-than-expected profit on strong fixed income trading. Regional banks reporting on Wednesday included Key, which saw its share price rise 4.2 percent to $8.94 after the Midwestern bank posted a smaller-than-expected first-quarter loss.

 

Apple advanced 6 percent to $259.22, a lifetime closing high, helping the Nasdaq end the session in positive territory a day after Apple posted quarterly results that eclipsed forecasts on record iPhone sales and forecast strong revenue growth. During the session Apple hit an all-time intraday high of $260.25.

 

However Merck fell 3.6 percent to $34.74 and was the Dow's largest drag, while Bristol Myers fell 1.3 percent to $25.10.

 

Worries about Greece's debt woes lingered, with Greek borrowing costs surging to a 12-year high on Tuesday. Talks on a potential aid deal with the EU and IMF began on Wednesday.

 

Financial stocks may reclaim the spotlight on Thursday as U.S. President Barack Obama is scheduled to visit New York and expected to urge Wall Street to get behind financial regulatory reform.

 

GM Makes Payment On Debt to Taxpayers

 

General Motors and Chrysler on Wednesday reported progress in their government-backed turnarounds, while the Obama administration still expects a loss on the taxpayer bailout of the industry although smaller than initially forecast. GM Chief Executive Ed Whitacre announced at a plant in Kansas that the automaker had fully repaid U.S. and Canadian government loans extended as part of its bankruptcy last year, and said there was "a real possibility" of an initial public offering this year.

 

"We are moving at GM and improving at a rapid pace," Whitacre said. "This is the new pace of GM today. GM's ability to pay back the loans ahead of schedule is a sign that our plan is working."

 

GM completed the repayment of its loans from the U.S. and Canadian governments by paying the outstanding balances of $4.7 billion and $1.1 billion respectively. Whitacre was scheduled to meet separately with Treasury Secretary Timothy Geithner and House Speaker Nancy Pelosi on Wednesday in Washington.

 

Meanwhile, Chrysler posted a $143 million operating profit in the first quarter and was on track to at least break even in 2010 on an operating basis with a stronger cash position. Chrysler emerged from bankruptcy in June 2009 under the management control of Italy's Fiat SpA. An IPO also is envisioned for Chrysler, although not as soon as GM's.

 

The better-than-expected progress at GM and Chrysler have "materially improved" chances the U.S. government will sell its stake in the companies sooner than expected, top White House economic adviser Lawrence Summers said in statement.

 

In an accompanying government report, overall bailout investments in GM, Chrysler and financing arm GMAC by the Bush and Obama administrations will "likely result in some loss." However, the report added that the Treasury Department anticipates the shortfall to be "much lower" than forecast last year.

 

In addition to the nearly $7 billion in direct loans to GM, the U.S. Treasury extended $43 billion in bailout cash in 2009 -- for a total $50 billion investment. The non-debt portion of help for GM was converted into equity during its bankruptcy and represents the 60 percent stake in the company owned by the government.

 

The potential loss on paper to taxpayers on GM alone was once thought to be as high as $30 billion, according to the White House budget office. The projected shortfall is now under $8 billion, according to market calculations. Updated projections mainly revolve around an analysis of old GM bonds, which have a claim on new equity and today would be worth about $33 billion to the government, figures show. Other gains include the $6.8 billion value of the loan repayment and roughly $2.2 billion in preferred stock held by the Treasury.

 

Chrysler owes the U.S. government nearly $7 billion in loans. Payments on principal are not due until 2011 and full repayment is not expected until 2014.

 

The rest of Chrysler's aid was converted to equity in the restructured company of which Treasury owns about 10 percent.

 

Summers said progress by automakers such as GM in repaying bailout funds was a bright spot for economic recovery, though the auto industry and economy have a long way to go to repair the damage from the recession.

 

The Treasury Department noted that the GM loan was repaid five years ahead of time. "We are encouraged that GM has repaid its debt well ahead of schedule and confident that the company is on a strong path to viability," Treasury Secretary Timothy Geithner said in a statement.

 

The repaying of the GM loans and the completion earlier in April of full accounting for its results since its emergence from bankruptcy in July 2009, were two key steps GM needed to make toward launching an IPO.

 

Canadian Industry Minister Tony Clement said the risk of job loss was too severe to ignore if the auto industry failed last year. "This was not a decision we took lightly," Clement told reporters. "We look forward to additional announcements ... when it comes to the equity share issue, which of course is not being addressed today," he sad.

 

Goldman’s Flanks under Attack

 

It was a mere hour or two after the news that Goldman Sachs was facing fraud charges that the firm’s rivals seized upon a possible opportunity push Goldman aside in some major underwriting deals.

 

Goldman’s competitors began by lobbying the Agricultural Bank of China to drop Goldman as an underwriter for the more than $20 billion IPO the Chinese bank is preparing. At the same time they were also asking officials at the Bank of Communications to ditch Goldman from its joint global coordinator role in the $6.1 billion rights issue that China's fifth-largest bank is planning for the Hong Kong Stock Exchange.

 

However, at this time there is no indication that either AgBank or Bocom will push Goldman aside.

 

In fact, AgBank on Tuesday asked the firm to take the lead in its planned road shows to sell the IPO to investors, according to one source. Nonetheless, Goldman’s competitors are well aware that in China how an organization is perceived can mean everything, and that a tainted Goldman could be vulnerable.

 

In particular, the nature of the case brought by the SEC provides fertile ground for the bank's rivals because it alleges that Goldman failed to tell clients key information about a subprime mortgage securities product that it sold to them in 2007. The product blew up during the financial crisis and led to the clients suffering big losses.

 

Goldman has addressed questions about client loyalty by saying that its impressive quarterly earnings on Tuesday underscored the support it has from clients. The bank has denied any wrongdoing and has vowed to fight the charges.

 

Some financial institutions are reviewing their dealings with Goldman Sachs during the financial crisis to see if they have any legal recourse. On Friday, attorneys for Lehman Brothers filed notices of subpoena for firms including Goldman seeking access to documents and employees.

 

AIG took a loss of up to $2 billion last year as it ended credit default swaps it had written on some Goldman-issued CDOs, though these were different from those at the center of the SEC suit. Firms of that nature may have issues hiring Goldman for advice.

 

The issues facing Goldman were underlined when Nick Clegg, the leader of Britain's Liberal Democrats, told a news conference on Tuesday that Goldman should be shut out of government contracts until the fraud case was settled. The party is enjoying a dramatic surge in popularity ahead of a national election on May 6.

 

It's a common practice in the cutthroat banking world to pounce on a competitor who is either wading through a public relations mess or financial trouble. When Lehman Brothers got into trouble, rival bankers expressed sympathy for their peer -- and simultaneously moved quickly to seize its clients.

 

The chance to cut Goldman out of a deal is the dream of many bankers because the firm has established itself as the top investment bank in the world. Its reputation and riches have been the envy of financial professionals.

 

That reputation took a hit with the fraud charges last week, adding to the impact of a stream of negative publicity over the past year. Yet, it would be an extraordinary measure for a company to drop Goldman entirely, especially given its stature, but there is now an impression among rivals that it is no longer impossible to successfully muscle in.